Peter Mandelson warns of European banking battle

Peter Mandelson has warned European nations not to try to 'get out of jail
free' by unilaterally guaranteeing all deposits in their banks.

By Mark Kleinman and Melissa Kite in Paris

9:58PM BST 04 Oct 2008

The new Business Secretary sent out his alert in an interview with The Sunday Telegraph after moves by Ireland and Greece — which have infuriated other countries including Britain.

Ireland and Greece moving to underwrite all savings prompted the comments

Mr Mandelson, who was Britain’s European trade commissioner until two days ago, called for greater co-operation between EU nations and warned of the dangers of a “new wave of economic nationalism”, which would create “distortions” and lead to an approach of “every man for himself”.

He spoke out as Gordon Brown attended an emergency summit in Paris to discuss the banking crisis.

The Prime Minister won approval for an immediate £12 billion EU fund to help small businesses across Europe hit by the credit crunch, with £12 billion more in the pipeline.

After the summit, hosted by President Nicolas Sarkozy of France, and also attended by Chancellor Angela Merkel of Germany and Silvio Berlusconi, the Italian Prime Minister, Mr Brown said: “We must do more to co-ordinate our response.

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“Every country represented here today wants to do whatever is necessary to ensure the stability of the system and to ensure the safety of hard-working families and businesses in each of our countries.”

The summit preceded an important week for the British economy. The Bank of England Monetary Policy Committee will decide on Thursday whether

to cut interest rates, with most analysts predicting a .25 percentage point drop to 4.75 per cent. The Government will also introduce legislation giving the Bank greater control to act in the event of an approaching bank failure.

The Prime Minister has faced criticism from Labour MPs over the return of Mr Mandelson, who has twice had to resign from the Cabinet.

The Sunday Telegraph has learnt that Mr Mandelson is being lined up to run Labour’s general election campaign — ensuring him a crucial strategic role before polling, expected in 2010.

The disclosure will alarm many Labour MPs who have attacked Mr Mandelson as a “divisive” figure.

Tensions remain inside the Cabinet, with Ed Balls, the Schools Secretary, admitting yesterday that bringing him back was “a risk”.

Mr Mandelson countered: “When your country is facing the economic challenges that we have, something approaching a national emergency, and you are called to the colours, you want to do your bit.

“Secondly, I helped create New Labour and I don’t want to see it fail. The party and the Government need to renew themselves and I want to help with both.”

Mr Mandelson warned countries not to follow the example of Ireland and Greece, which have issued full guarantees to all savers in their banks — moves which the European Commission has said could be illegal. Greece’s move is worth £250 billion while Ireland’s, which puts British lenders at a particular disadvantage, is worth £310 billion.

Mr Mandelson said: “The danger of this crisis is that it may spark a new wave of economic nationalism, with each country looking for its own 'get out of jail free’ card. People have to realise that selective or national approaches could lead markets to look to parts of the financial system in a distorted way.”

He stopped short of endorsing plans for an EU-wide £230 billion fund to be used if one of the member states’ key banks or financial institutions faces serious trouble. The scheme was proposed by France but received such a negative response Mr Sarkozy has washed his hands of it.

The United States has earmarked $700 billion to rescue its financial sector. The bail-out finally passed through Congress on Friday night.

British banks face another setback this week when the Competition Commission is expected to recommend that they be banned from selling unemployment and sickness insurance with loans. The commission thinks the banks make hundreds of millions of pounds in excess profits.